California law targets slavery risks in business supply chains

NEW YORK (TrustLaw) - California is now the first U.S. state to require major retailers and manufacturers doing business in its borders to publicly disclose measures taken to eradicate forced labor and human trafficking from their supply and distribution chains.

The California Supply Chain Transparency Act, which came into effect on Jan. 1, applies to companies with sales of $100 million or more in California and primarily affects retailers and manufacturers of clothing and other consumer products. Many of those working in the clothing manufacturing business traditionally are women.

The number of firms involved is about 3,200, according to California’s Franchise Tax Board. In November, and every November thereafter, the California Franchise Tax Board is scheduled to provide a complete list of firms obliged to comply with the new law to the state Attorney General.

California’s enormous economy would rank around 8th in the world according to Gross Domestic Product. As a result, actions it takes on issues such as trafficking and greenhouse gases tend to be watched and followed by other states.

The bill, signed into law in 2010 by then-govenor Arnold Schwarzenegger, was vigorously opposed by the California Chamber of Commerce, the California Grocers’ Association and other business groups who objected to the problems faced by American firms if obliged to audit anti-trafficking compliance by foreign elements in their supply and distribution chains.

“This could be anything. The product could be leather shoes, the product could be a blouse, could be a chair, could be gasoline,” Rod Pacheco, a Los Angeles-based partner with the law firm SNR Denton and a former district attorney of Riverside County, told TrustLaw.

Pacheco, a former California State Assemblyman who worked with Senator Steinberg, said it is unclear how big the trafficking problem is in terms of goods sold in California.

“I don’t know how widespread it is because it exists more as a black market enterprise. I know it involves a lot of illegal immigrants. I know there were cases we had where people were enslaved and required to work off their debt in a variety of different ways,” Pacheco told TrustLaw.

He noted that typically people from Mexico, Central and South America and China pay large sums to be brought into California by guides, called coyotes, who then turn them over to a variety of employers.

“For the fashion industry and the retail industry, this is a big deal,” Monica Richman, a New York City-based SNR Denton partner representing high-end retailers and fashion brands, told TrustLaw. Anticipating the national ripple effect of California’s new law, the New York City Bar Association created a committee on fashion law last summer for which Richman serves as the inaugural chair.

“This is the first time there is a law saying that there is a high level of accountability. Before, it was always a moral cause and good business. But now, as of January 1, you are supposed to put (information) on your corporate website, for the public, that shows compliance with the new law with sufficient details of your supply chain,” said Richman, noting that many companies, including Burberry, Gap and The Limited, have long posted versions of such information on their sites.

“Know your suppliers well,” was her advice. “Be very cautious if you’re doing a new engagement. Really try to have random inspections. Be very proud of every element of your supply chain. And, then, conduct business as usual.”

Although full details of reporting requirements are still being finalized, the basic information required from businesses includes:

* Showing it engages in verification at every level of the supply chain that human trafficking or slavery was not involved

* Conducting regular audits of suppliers to ensure compliance with company standards regarding trafficking or slavery

* Requiring direct suppliers to verify that materials used in products comply with trafficking and slavery laws of the countries where they do business

* For all employees, providing training in awareness of human trafficking and of slavery

Read the U.S. Department of Labor’s 2011 report on goods produced by child labor or forced labor here.

For a factbox on products made worldwide by forced adult labor and child labor, see here.

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